The Importance of Tax Adjustments When Evaluating Wage Expectations

28 Pages Posted: 12 Mar 2019

See all articles by Stefan Klößner

Stefan Klößner

Saarland University

Gregor Pfeifer

The University of Sydney

Date Written: April 2019

Abstract

Using elicited expectations of future gross salaries, we evaluate characteristics causing German students to make larger or smaller estimation errors. While students seem to underestimate actual salaries by 18 percent, we show that these errors are highly attributable to misconceptions of the progressive income tax. Developing a suitable adjustment procedure, we correct students’ estimates and find that errors decline by 12 percentage points. Conducting regression analyses, we reveal strong connections with students’ age, gender, work experience, secondary school track, and knowledge about student loans. These results change notably if not controlling for students’ misconceptions of the tax system.

Keywords: Human capital, progressive (income) tax, returns to education, wage differentials

Suggested Citation

Klößner, Stefan and Pfeifer, Gregor, The Importance of Tax Adjustments When Evaluating Wage Expectations (April 2019). The Scandinavian Journal of Economics, Vol. 121, Issue 2, pp. 578-605, 2019, Available at SSRN: https://ssrn.com/abstract=3349370 or http://dx.doi.org/10.1111/sjoe.12296

Stefan Klößner (Contact Author)

Saarland University ( email )

Stadtwald
Saarbrucken, Saarland D-66123
Germany

Gregor Pfeifer

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

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